This chapter addresses the accounting for modifications, including termination, of a lease contract. It also addresses the accounting for lease remeasurements for reassessment events that are not modifications.
Depending on the facts and circumstances, a lease modification may be accounted for by the lessee and lessor as either (1) two contracts – the original contract and a separate new contract, or (2) one modified contract. The separate new contract in (1) should be evaluated for whether it contains a lease. Similarly, the one modified contract should be evaluated for whether it contains a lease. When a lease modification is accounted for as one modified lease, the lessee and lessor must reconsider the lease classification and remeasure the lease.
ASC 842 also describes other circumstances in which a lessee must reconsider certain assumptions made at the lease commencement date (e.g., whether exercise of a renewal or purchase option is reasonably certain) and remeasure the lease liability and adjust the related right-of-use asset. In some of those cases, ASC 842 requires a lessee to reassess the classification of a lease.
A lessee is required to remeasure its lease liability and adjust the related right-of-use asset upon the occurrence of the following:
  • Lease modifications not accounted for as a separate contract
  • A triggering event within the lessee’s control that changes the certainty of a lessee exercising an option to renew or terminate the lease, or purchase the underlying asset
  • An event written in the contract occurs that obligates the lessee to exercise or not exercise an extension or termination option
  • A change to the amount probable of being owed by the lessee under a residual value guarantee
  • The resolution of a contingency upon which variable lease payments are based such that those payments become fixed
A bankruptcy filing may be a remeasurement trigger for a lessee although changes in circumstances before the bankruptcy filing that are within the lessee’s control may trigger a remeasurement before such filing. See BLG 1.2 for information about voluntary and involuntary bankruptcy filings.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides temporary relief from contract modification requirements related to reference rate reform. Under this guidance, both lessees and lessors may elect an optional practical expedient to not apply modification accounting to all contract modifications that replace a reference rate if certain criteria are met. For more details, see chapters 1, 2, and 4 of PwC’s Reference rate reform guide.
A lessor is not required to remeasure a lease unless the lease contract is modified.
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